March 23, 2012 / 8:31 AM / 6 years ago

GLOBAL MARKETS-Growth, debt nerves keep world stocks off recent highs

LONDON, March 23 (Reuters) - World stocks held below this week’s eight-month peak on Friday while demand for German government debt rose as concerns about Chinese and euro zone growth and a renewed focus on sovereign debt problems in Italy and Spain kept investors cautious.

Growth is an essential component of plans by struggling euro zone countries to reduce high debt levels and with economies slowing, planned bond sales by Italy next week could refocus investor attention on the bloc’s debt crisis.

The MSCI world equity index was slightly down on the day, having hit its highest level in nearly eight months earlier this week. The rally has stalled on the back of weak factory activity data in China and the euro zone, which has somewhat undermined faith in the pace of a global upturn.

“We are still concerned about some macro themes, namely a potential hard landing in China,” said Atif Latif, director of equities and derivatives at Guardian Stockbrokers.

“We are not out of the danger zone, contagion is a reality ... for countries in the EU zone namely Spain, Italy and Portugal. Banking systems in these countries are very weak and may be more serious than models have priced in.”

European stocks lost 0.4 percent, while emerging stocks fell 0.15 percent, led by falls in Shanghai and Tokyo.

U.S. stock futures were down 0.1 percent, pointing to a weaker open on Wall Street later.

The benchmark MSCI index has still gained more than 10 percent since January, especially following the European Central Bank’s massive offer of cheap three-year loans to banks struggling to repair balance sheets hit by the euro debt crisis.

“Global markets are taking a breather, anticipating large rebalancing outflows out of equities into fixed income, because the relative performance of equities has been very significant this quarter,” said Lex van Dam, hedge fund manager at Hampstead Capital, which manages $500 million of assets.

Brent oil was up 0.5 percent at $123.74 a barrel, underpinned by worries that military conflict with Iran will hit supplies and create an oil price spike.

German government bund futures were 45 ticks higher on Friday and up more than 150 ticks this week as the mood has soured, with optimism about the U.S. economy giving way to worries over a weak growth outlook in the euro zone.

While Spain has borne the brunt of deteriorating investor appetite for peripheral debt after it ripped up agreed deficit targets, Italy may come under closer scrutiny as Prime Minister Mario Monti meets stiff resistance to proposed labour reforms.

“If he doesn’t gain traction and opposition support, he won’t be able to get the reforms through ... and that would be the catalyst for underperformance of Italy versus Spain,” said Achilleas Georgolopoulos, strategist at Lloyds Bank.

Italy is due to sell five- and 10-year BTPs next week.

Spain’s slippage on its budget goals has seen its 10-year bond yield rise as much as 44 basis points above that on equivalent Italian debt.

The yield on Italy’s benchmark 10-year government bond rose 6 basis points to 5.16 percent on Friday with its default insurance costs also higher. Spanish yields also rose 3 bps to 5.54 percent.

The dollar fell 0.3 percent against a basket of major currencies. The yen fell 0.5 percent to 109.50 per euro .

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